Branches

of
Economics

Chapter 2
Macroeconomics
– From the Greek prefix makro meaning “large” and
economics
– A branch of economics dealing with the
performance, structure, behavior and decision
making of an economy as a whole rather than
individual markets.
– This includes national, regional and global
economies.
 Basic
Macroeconomic
Concepts
National Output
– The total amount of everything a country produces in a given
period of time.
– Output and income are usually considered equivalent because
everything that is produced and sold generates an equal amount
of income.
– Macroeconomic output is usually measured by gross domestic
product (GDP).
– Advances in technology, accumulation of machinery and other
capital, and better education and human capital all lead to
increased economic output over time.
Unemployment
– Measured by the unemployment rate (the
percentage of workers without jobs in the labor
force)
– The unemployment rate in the labor force only
includes workers actively looking for jobs.
– People who are retired, pursuing education or
discouraged from seeking work by a lack of job
prospects are excluded.
Types of Unemployment
– Classical unemployment occurs when wages are too high for
employers to be willing to hire more workers.
– Frictional unemployment occurs when appropriate job vacancies
exist for a worker but the length of time needed to search for and
find the job leads to a period of unemployment.
– Structural unemployment covers a mismatch between workers’
skills and the skills required for open jobs.
– Cyclical unemployment depends unemployment based on the
current stage the economy is in the business cycle.
– Seasonal unemployment refers to unemployment of jobs available
only on certain seasons.
Macroeconomic
Models
Aggregate Demand – Aggregate
Supply (AD-AS Model)
– It shows the price level and level of real output given the equilibrium in
aggregate demand and aggregate supply.
– The aggregate demand curve’s downward slope means that more output
is demanded at lower price levels.
– The downward slope is the result of three effects: the Pigon or real
balance effect which states that as real prices fall, real wealth increases,
resulting in higher consumer demand of goods; the Keynes or interest
rate effect, which states that as prices fall, the demand for money
decreases causing interest rates to decline and borrowing for investment
and consumption to increase and the net export effect, which states that
as prices rise, domestic goods become comparatively more expensive to
foreign consumers, leading to decline in exports.
IS-LM Model
– Represents all the combinations of interest rates and
output that ensure the equilibrium in the goods and
money markets.
– The goods market is represented by the equilibrium in
investment and saving.
– The money market is represented by the equilibrium
between money demand and money supply.
Growth Model
– By Robert Solow
– It begins with a production function where national
output is the product of two inputs: capital and labor.
– An increase in output, or economic growth, can only
occur because of an increase in the capital stock, a
larger population, or technological advancements
that lead to higher productivity.
Macroeconomic
Policy
John
Maynard
Keynes
General Theory of
Employment,
Interest and Money
Quantity Theory of
Money
Milton
Friedman
Monetarism (money
demand and money
supply)
Monetary Policy is
more effective than
Fiscal Policy
Robert
Lucas
Rational
expectations
to economics
Microeconomics
– From Greek prefix mikro meaning “small“
– A branch of economics that studies the behavior of
individuals and firms in making decisions regarding the
allocation of limited resources.
– One of its goals is to analyze the market mechanisms
that establish relative prices among goods and services
and allocate limited resources among alternative uses.
Microeconomic
Topics
Demand, Supply and
Equilibrium
– In a perfectly competitive market with no
externalities, per unit taxes or price
controls, the unit price for a particular good
is the price at which the quantity demanded
by consumers equals the quantity supplied
by producers.
Elasticity
–The measurement of how
responsive an economic
variable is to a change in
another variable.
Consumer Demand
Theory
– It relates preferences for the consumption of
both goods and services to the consumption
expenditures.
– It is a way of analyzing how consumers may
achieve equilibrium between preferences and
expenditures by maximizing utility subject to
consumer budget constraints.
Theory of
Production
–It is the study of production,
or the economic process of
converting inputs into
outputs.
Costs of Production
–It states that the price of an object
or condition is determined by the
sum of the cost of the resources
that went into making it.
Perfect Competition
– It describes markets such that no participants are
large enough to have the market power to set the
price of a homogeneous product.
– All the knowledge such as price and information
pertaining goods is equally dispersed among all
buyers and sellers. As all goods and products are the
same, advertisement is not required and it helps save
the advertisement cost.
Monopoly
– It exists when a single company is the only supplier of a
particular commodity.
– Prices in monopoly market are stable as there is only one
firm and so there is no competition. Due to the absence of
competition there are high profits and leads to high
number of sales monopoly firms tend to receive super
profits from their operations. Monopoly firms also offers
services effectively and efficiently.
Oligopoly
– It is a market form in which a market or industry
is dominated by a small number of sellers.
– As there is less competition in the firm, it tends
to have massive profit. It is also able to easily
compare prices forces these companies to keep
their prices in competition with the other
companies involved in the market.
Duopoly
–It is a special case of an oligopoly
with two firms.
–Game theory tends to govern
duopoly and oligopoly behavior.
Monopolistic Competition

–Also called a competitive market

–There is a large number of firms,
each having a small proportion of
the market share and slightly
differentiated products.
Monopsony
–There is only one buyer in the
market.
Oligopsony
–It is a market where many sellers
can be present but meet only a few
buyers.
Labor Economics
– It seeks to understand the functioning and
dynamics of the markets for wage labor.
– It looks at the suppliers of labor services
(workers), the demands of labor services
(employers), and attempts to understand the
resulting patterns of wages, employment, and
income.
Welfare Economics
– It is a branch of economics that uses
microeconomic techniques to evaluate well-
being from allocation of productive factors
as to desirability and economic efficiency
within an economy, often relative to
competitive general equilibrium.
Information Economics

– It is a branch of microeconomic theory that

studies how information and information systems
affect an economy and economic decisions.
– Information has many characteristics. It is easy to
create but hard to trust. It is easy to spread but
hard to control. It influences many decisions.
Financial Economics
– Is the branch of economics characterized by a
“concentration on monetary activities” in which
“money of one type or another is likely to appear
on both sides of a trade”.
– It is the allocation and deployment of economic
resources, both spatially and across time, in an
uncertain environment.
Public Economics
– It examines the design of government tax
and expenditure policies and economic
effects of these policies.
Political Economy
– It examines the role of political
institutions in determining policy
outcomes.
Health Economics
– It examines the organization of health
care systems, including the role of
health care workforce and health
insurance programs.
Urban Economics
– It examines the challenges faced by
cities, such as sprawl, air and water
pollution, traffic congestion and
poverty, draws on the fields of urban
geography and sociology.